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Ph.D., CSP, CDR, US Navy Ret.,
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Are You Living With Lifestyle Inflation?

Normal inflation is the general upward movement of prices. In the US, from August 2016 to August 2017 out inflation rate was a mere 1.9%.

Lifestyle inflation is when we quickly increase income to a higher standard of living.

Most people have not heard the term “lifestyle inflation’ but most fall victim to it at some time or another. In simple terms, it means that when an individual earns more, they are likely to spend more as well, regardless of whether or not they actually need or intend to do so. A recent study by the US Bureau of Labor Statistics revealed that most households continue to spend at least 50% of their income on housing and transport, regardless of how much they earn.

An example of lifestyle inflation can be seen when students graduate from college and move into full-time employment. While in college, they likely got by on a very limited budget, however, now that they are earning more money, they will inevitably spend more. They move out into a place of their own, buy a car, and splurge more on entertainment. These added expenses aren’t essential, and the majority of college graduates will undertake them anyway.

To an extent, there is nothing wrong with limited lifestyle inflation. It is natural. As earnings increase, we want to move to bigger or better-situated housing, to purchase better-quality goods and services, and to spend more on food and entertainment. We want more steak and less macaroni and cheese.

The more we make, the more we spend. (Lifestyle hypothesis??) Another theory is that we get used to living a certain way, and we continue to spend that way, even if our income significantly decreases. Once we get used to eating steak, we do not want to go back to macaroni and cheese three nights a week, even if that is all we can afford.

Issues arise when lifestyle inflation is unconscious or uncontrolled. It can lead to situations where families live paycheck to paycheck no matter how much their income increases. Lifestyle inflation can make it difficult to save money, manage personal finances, or pay off debts.

When people ask how to pay off debt, the first question I ask is, “How much is that debt and long have you had it?” People are often comfortable with a certain amount of debt, so even though they have had three pay raises, that debt has remained stubbornly in place. This is due to lifestyle inflation. They don’t take the debt seriously until it goes over their debt comfort threshold. They won’t make any changes to their spending until that threshold is reached and exceeded.

Because lifestyle inflation is largely an unconscious process, it can be difficult to manage. A crucial part of getting it under control is making it visible, building an awareness of just how much is being spent, and how much could be saved. Here are some techniques:

  1. Have a Personal Spending Plan

Many people think the word “budget” implies restrictions. A spending plan is exactly that –a plan for how you want to spend your hard-earned income. There are a multitude of benefits to maintaining a budget and tracking personal expenses. Among them is the fact that you will be able to clearly and unequivocally see when your spending increases, and how much of your income you are using on a regular basis. Making yourself aware of your spending habits is the first step towards controlling them and limiting lifestyle inflation.

If you need a great spending plan, click here for “2ndLT/Ensign Monthly Budget Plan,” a budget I created for military people. It is a downloadable excel sheet that is easy to use. Unlike some other budgets, you download it so it is secure to your computer, it is interactive, allows you to change the categories, and it does the math for you.

  1. Put It On The Calendar

Track both the savings and the debt. If you have credit card debt (any amount that you are not able to pay off), add it all up and put that dollar on the calendar on that date. Additionally, add up everything in the savings account and write down that number as well. As the debt number goes down and the savings number increases, motivation to continue builds, making it easier to stayed focused.

  1. Move Money To Save Into a Separate Account In Another Credit Union

If you don’t see it, you won’t miss it.

The problem with online checking and savings accounts is that we can see what we have any time. Getting cash for the weekend and running short in the checking account? No problem. You are covered by what is in the savings account, so just withdraw there. This makes it far too easy to dip into that savings account, which is supposed to be what is says it is – a savings account.

To combat this temptation, consider removing excess money from your account altogether. When you receive a raise or other increase in regular earnings, or you want to make sure you are saving that 10% of your income, simply calculate how much extra you are receiving per month and set up a standing order to move this amount to a separate account in a different financial institution. With the extra income out of sight, you are vastly more likely to save it rather than spend it.

  1. Avoid Spontaneous Spending

It’s natural to want to celebrate whenever your earnings increase, but doing so by racking up new regular expenses is counterproductive. That means you never see any real increase in the amount that you’re able to save.

If you are thinking about increasing your living expenses (for example, buying a bigger house, buying a car, or taking a vacation) don’t be tempted into doing so just because your earnings have increased. Strategically plan changes in your lifestyle carefully, rather than making them on impulse.

It is not what we make, it is what we don’t spend that allows us to build wealth.

One of every three Americans has nothing saved in retirement accounts. The average family has less than $7,000 of savings for emergencies. Yet these same households often splurge regularly, with dining out, expensive coffee, and the latest smartphone.

We work hard for out income, and we should enjoy it, but we also need to be smart about how we spend.


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